Question

A new auditor has joined your firm and your job is to provide instruction in the factors most important to completing the auditing cycle for payroll cycle. Prepare a one-page summary based on your learning and understanding.

Answer 1

The objective of the ordinary audit of financial statements by the independent auditor is the expression of an opinion on the fairness with which they present, in all material respects, financial position, results of operations, and its cash flows in conformity with generally accepted accounting principles. The auditor's report is the medium through which he expresses his opinion or, if circumstances require, disclaims an opinion. In either case, he states whether his audit has been made in accordance with generally accepted auditing standards. These standards require him to state whether, in his opinion, the financial statements are presented in conformity with generally accepted accounting principles and to identify those circumstances in which such principles have not been consistently observed in the preparation of the financial statements of the current period in relation to those of the preceding period.

The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, that are not material to the financial statements are detected.

To help determine whether Board members have carried out their duties free from bias, appointed auditors will review information provided by the Board that identifies related parties and will be alert for other material related party transactions. Depending on the circumstances, we may enquire whether the Board has complied with any statutory requirements for conflicts of interest and whether these transactions have been properly recorded and disclosed in the financial statements.

1. Identify and assess the risks of material misstatement of the financial statements, design and perform audit procedures in response to those risks and obtain sufficient and appropriate audit evidence. The auditor also asserts that the risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations or the override of internal controls.
2. Conclude on the appropriateness of the directors’ use of the going concern basis on accounting and whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. Where the auditor concludes that a material uncertainty exists, they are required to draw attention in the auditors’ report to the related disclosures in the financial statements. Where such disclosures are inadequate, the auditor will have to modify the opinion. The auditor will also have to assert that future events or conditions may cause the entity to cease to continue as a going concern.
3. Evaluate the overall presentation, structure and content of the financial statements of the entity, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.